Friday, March 13, 2009

Michael Sabia's Coup d'État?


The Caisse de dépôt et placement du Québec today announced the appointment of Michael Sabia as President and Chief Executive Officer:
In accordance with the Caisse’s constituting statute, the appointment was made by the Board of Directors and ratified by the Québec government. Mr. Sabia will take up his duties immediately.

Mr. Sabia, who is 55 years of age, was President and Chief Executive Officer of BCE from 2002 to July 2008, after serving in other senior positions within the group. Previously, he was Chief Financial Officer at CN when the railway was privatized and then taken public. He began his career with the federal Finance Department and later served as Deputy Secretary with the Privy Council Office in Ottawa.

“We’re very pleased that Mr. Sabia has accepted this challenge, and that we can draw on his financial acumen and experience as a senior corporate executive. The Board welcomes him to the institution and offers him its full support,” said Robert Tessier, Chairman of the Caisse.

“Mr. Sabia’s career has been marked by major achievements,” Mr. Tessier added. “He played a leading role at CN, making into a North American freight leader, and in key stages of BCE’s development, including the simplification of its operations, which resulted in strengthening the company’s balance sheet and positioning it well for the future. In the 1980s, he played a key role in the transformation of the Canadian tax system when the GST was introduced.”

Mr. Sabia said he was very honoured and proud to take the helm of the Caisse, one of Quebec’s major achievements and a leading financial institution in Canada and around the world. “The Caisse de dépôt et placement du Québec has played a unique role in the province and will continue to play a vital role,” Mr. Sabia said. “I’m eager to join its hundreds of dedicated employees and to work with them to restore Quebecers’ pride in the institution.”

On behalf of the Board, Mr. Tessier expressed his sincere thanks to Fernand Perreault for the excellent job he did in recent months, on short notice, as President and Chief Executive Officer. “Mr. Perreault demonstrated an exemplary sense of duty and the utmost commitment to the institution,” he said.

The rumors hit yesterday and the reviews were mixed. Following today's announcement, Les Affaires writes Michael Sabia ne fait pas l'unanimité ("Michael Sabia is not the unanimous choice").

Gordon Pitts and Bertrand Marotte of the Globe and Mail write, Has Sabia jumped from the frying pan into the fire?:

As Michael Sabia wrestled with whether to take the hot seat at Quebec's troubled public pension fund, he consulted with his mentor Paul Tellier, the hard-nosed veteran Montreal executive and former federal public servant.

“I said, ‘Michael, criticism is going to come down you like a ton of bricks,' ” Mr. Tellier recalled warning his old friend, as he mulled over the offer of the president's job at the battered Caisse de dépôt et placement du Québec.

“I said, ‘Those people who don't like to see an English-speaking Canadian of Italian origin in the job are going to dump on you – that you are not a francophone, that you are not really a Quebecker,' ” Mr. Tellier said, recalling the conversation.

He warned that detractors would say Mr. Sabia, 55, was a failure at BCE Inc., where he led the company through a painful reorganization and a private equity takeover – which collapsed after he left.

Yet Mr. Tellier, whose career has been intertwined with Mr. Sabia's for 20 years, urged Mr. Sabia to take the job. “It's a hell of a challenge,” he said.

Friday, Mr. Sabia took up that challenge. He was named the new president and CEO of the $120-billion Caisse, Canada's largest pension fund manager, whose disastrous investments carved 25 per cent from its asset value in 2008.

Mr. Sabia faces a major challenge overcoming not only skepticism about his appointment among those outside the Caisse, but also in winning over Caisse employees who have seen the institution's reputation battered in recent months.

The Caisse's 2008 losses were exacerbated by its heavy position in currency- and stock-related derivatives, which left it facing huge margin calls when equity markets and the Canadian dollar crashed in October. It was forced to sell stocks and unwind some futures contracts to prevent future margin calls, which, combined with its massive holding of illiquid non-bank ABCP, raised questions about the Caisse's risk management – an issue the Charest government has promised the next CEO will address head on.

For Mr. Sabia, taking the Caisse job is another dramatic move in a career marked by jarring shifts between public and private sectors, by taking on outsized challenges, and attracting bitter criticism from detractors and passionate defence from his supporters.

Friday, at a press conference unveiling Mr. Sabia, the theme was very much one of experience trumping politics, as Mr. Sabia and Caisse chairman Robert Tessier were grilled about Mr. Sabia's qualifications for taking on the giant pension fund as it reels from its worst-ever loss.

“Michael has all the qualities of a strong leader who demonstrated his capacity in managing complex organizations,” said Mr. Tessier, who was named to his job at the Caisse just over a week ago.

The nomination was immediately controversial, unleashing a cyberspace backlash as much from BCE shareholders dissatisfied with Mr. Sabia's tenure at the telecom giant as among nationalist Quebeckers.

Former Parti Québécois premier Bernard Landry lambasted the appointment: “It's more than a mistake, it's a fault that comes close to being a provocation,” he said in a Radio Canada television interview. “It has nothing to do with where Mr. Sabia was born … it has to do with his career, his social-economic culture, his national culture which is Canadian.”

Mr. Sabia's nomination only a week after Mr. Tessier's appointment and the formation of the selection committee – also raised eyebrows. The move suggested the government had already set its sights on Mr. Sabia before naming Mr. Tessier.

Mr. Tessier took great pains to describe the recruiting process as thorough and professional.

Even before he signed on, Mr. Tessier, a former Quebec bureaucrat and head of Gaz Métro, says he wanted to know every detail about the selection process for a new CEO.

He was told that the executive search firm of Egon Zehnder International had been retained to come up with a short list, and Mr. Tessier said it had two names left on it by the time he was named chairman. One of those names struck him as an opportunity not to be missed.

“When I saw Michael Sabia's name it was, for me, a revelation. When I saw that, I said ‘We're lucky' and I put my foot on the accelerator.”

Mr. Tessier did not name the other candidate. But Luc Bertrand, the man who built the Montreal Exchange into a top derivatives market over the past decade, had been widely considered a top contender for the job.

Mr. Bertrand recently announced his resignation from TMX Group Inc., which now owns the MX. That fuelled speculation that he might get the post. He never publicly said whether he had been approached, but was known to have been interested.

Mr. Tessier said he sat down with Mr. Sabia to find out if he was serious about taking on the task. He also made sure Quebec Finance Minister Monique Jérôme-Forget had a talk with Mr. Sabia.

The Caisse board's four-person selection committee met on Monday to discuss a report from the recruiting firm that recommended Mr. Sabia as an exceptional candidate. The committee reported to the Caisse board Friday morning and it too agreed.

Mr. Sabia revealed it was not the first time he had been approached. The Caisse contacted him last year when it was looking to replace Henri-Paul Rousseau, who stepped down in May. But Mr. Sabia, who was still at BCE, declined to be considered a candidate. The arrival of Mr. Tessier as chairman was one factor that helped him decide to take the job this time around, he said.

The board ended up selecting Caisse insider Richard Guay, a senior executive who went on medical leave as the financial meltdown began last fall. He officially stepped down in January, when another Caisse veteran – Fernand Perreault – took over as interim CEO.

Mr. Sabia said he was approached again at the end of January or beginning of February, and this time he was ready.

Mr. Tessier said Mr. Sabia is a world-class catch and that he decided to take up the Caisse challenge despite offers for top-flight positions in Europe, North America and even Asia.

Mr. Sabia took on the allegations that – as a native of Ontario whose first language is English – he is insufficiently steeped in the ways of Quebec Inc. He said his leadership at Montreal-based CN and BCE speaks for itself.

“I think we live in a ‘show-me” world, not a ‘trust-me' world.”

Mr. Sabia, who speaks comfortably in French although with a pronounced accent, said he has lived in Quebec for 16 years and that he and his family made a commitment to living here.

“In 1993, I chose Quebec. I chose Quebec again in 2000. And now, with other opportunities [available] in Europe, the United States, I chose Quebec again. Why? Because for my family, for myself, Quebec is home.”

Mr. Tellier certainly feels Mr. Sabia will rise above the complaints of nationalists that he is not francophone enough. “Who cares? Whether Jacques Parizeau like this or not, I don't think Michael is going to give a shit.”

But can he move from running a company to managing the largest investment portfolio in the country? Mr. Tellier has no doubt, calling his protegé “an outstanding mind, a work addict. The best place to reach Michael Sabia at 2 o'clock in the afternoon on Sunday is in his office.

Furthermore, he says, Mr. Sabia has considerable experience at Canadian National Railway and BCE working with the capital markets. “Michael knows how to listen, and before diving, he wants to make sure there is water in the pool.”

Mr. Tellier met Mr. Sabia when the older man was clerk of the federal Privy Council in the late 1980s and Mr. Sabia was the official who piloted major tax reform including a new goods and services tax.

Mr. Tellier moved over to become CEO of Canadian National Railway Co. and recruited Mr. Sabia as chief financial officer in the massive privatization of the government-owned railway.

Mr. Sabia moved to BCE Inc. as then-CEO Jean Monty was embarking on an acquisition binge to position the huge telecom holding company as a new-age player in media convergence. When markets and deals turned sour, Mr. Monty was dumped by the board, Mr. Sabia took over as CEO.

That reunited Mr. Sabia with Mr. Tellier, who is a BCE board member. And it gave him a new friend – BCE chairman Richard Currie, the former Loblaw CEO who became Mr. Sabia's most stalwart supporter.

Mr. Sabia also consulted Mr. Currie about the new job, and Mr. Currie urged him to take it. “What Michael inherited at BCE was a mess and he fixed it. He's inheriting what I perceive to be a mess [at the Caisse] and he'll fix that, too,” Mr. Currie said Friday.

I must admit that I was surprised that Michael Sabia was chosen for this position. I spoke with many people who were equally surprised. One person asked me: "Why didn't they choose someone with market experience?" We talked about Réal Desrochers who recently retired from CalSTRS and a few others.

But it then struck me. Michael Sabia was chosen for one good reason: he is an outsider with no allegiance to anyone and he will clean up the house. As Mr. Tellier said in that article, he "doesn't give a shit" about the politicians.

Cynics will harp on his track record at Bell Canada, but they are missing the bigger point. Michael Sabia's main strength might be what others perceive as his weakness.

Morever, Mr. Sabia is no stranger to dealmakers:

Michael Sabia, the new head of Caisse de depot, is no stranger to tough-talking private equity investors and managing a complicated operation -- helpful experience as he works to shore up the powerful Quebec pension-fund manager after a rocky year.

Sabia, 55, spent most of this decade streamlining and stabilizing BCE Inc, Canada's biggest telecom company, before hammering out a deal with a group of private-equity investors to buy the company for C$34.8 billion ($27.4 billion).

The deal ultimately ended in failure late last year amid a deep freeze in the credit markets, but Sabia remains well regarded as a seasoned corporate executive.

"He has a track record of being able to do what is necessary and in the best interests of the people involved with his time at BCE," said Gavin Graham, director of investments at BMO Asset Management.

The Caisse de depot et placement du Quebec manages funds for public and private pension and insurance plans, and at the end of 2008, it had C$120.1 billion in net assets, making it one of the most powerful institutional investors in Canada.

The Caisse has hardly been immune to economic turbulence, recently announcing that it lost about C$40 billion in 2008 as financial markets melted down. The losses prompted a shuffle in the Caisse's top ranks and prompted political criticism in its home province of Quebec.

On Friday, Sabia said in a statement that he is eager to work with the Caisse "to restore Quebecers' pride in the institution."

His political experience could also help. He worked for the federal government from 1983 to 1993, including posts at the Department of Finance and the Privy Council Office. Perhaps his best known policy achievement is the design and implementation of the goods and services tax.

Before joining BCE in 1999 and becoming the Montreal-based company's CEO in 2002, Sabia was chief financial officer of CN Rail where he worked to turn the Crown corporation into a publicly traded freight carrier.

The Caisse was also part of one of the consortiums that were in the running to take BCE private before a group led by the Ontario Teachers Pension Plan was ultimately announced as the buyer-to-be.

Sabia told reporters on Friday that even though the deal collapsed in the end, "what is important is that, thanks to all the work between 2002 and 2008, we built a firm at BCE that was strong and stable.

"So when I look back at those years I think we established a BCE, a Bell Canada for the future."

Sabia has been educated both in Canada and the United States, having studied economics and politics at the University of Toronto and at Yale University.

The irony in all this is that Mr. Sabia is now heading Canada's largest pension fund after battling it out with Ontario Teachers' Pension Plan whose open dissatisfaction with Mr. Sabia's performance at BCE Inc. helped put Canada's biggest telecom in play.

Well, Ontario Teachers' bit off more than it can chew on that BCE deal and like everyone else, it's heading for a fall. Jim Leech, its President & CEO, confirmed this on CBC Radio today stating that Teachers' performance will be a little better than the median performance of -18.5% and that they are planning for single digit returns in the future (click here and then click on part 1 to listen to that interview).

Mr. Leech stated that the inflation risk is probably four years away. In the short-term, Teachers' "biggest concern is deflation". They have adopted a more defensive approach, lowered their exposure to equities, increased their infrastructure investments which has implicit and explicit ties to inflation and better profile of their liabilities and they upped the liquidity requirements, having cash on the sidelines if opportunities arise.

Mr. Leech stated that the crisis was a "real eye-opener" and that most of the young people never saw this type of a crisis. "Fortunately we have a number of veterans at the top and were able to make some adjustments and keep a steady hand on the wheel."

On governance, Mr. Leech said that they actively manage their investments and they believe that good governance leads to better performance. [Note: Mr. Leech avoided discussing the issue of pension governance and the abuse of benchmarks in private markets and other investments.]

Keith Ambachtsheer followed Jim Leech stating that the "wreckage was widespread" and that "nobody was expecting the depth of this crisis." He went on to discuss retirement savings and he pushed the idea of an arms-length entity which he wrote about for the C.D. Howe Institute, Canada Supplementary Pension Plan (CSPP).

[Note: Great idea but I am against one mammoth pension fund and if you do not get the governance right - stressing total transparency, accountability and open communication - it will fail.]

Finally, click on Part 3 of that link, to listen to an excellent interview with Liaquat Ahamed discussing the Lords of Finance. Mr. Ahamed's insights are based on a rich understanding of history. He is also optimistic on the future but warns that the stimulus packages were not enough. Mr. Ahamed thinks the recovery should kick in towards the end of this year.

That's good news for Mr. Sabia who will be in a good position to slowly rebuild the Caisse from the top down. He needs to start cleaning the "basket Caisse" by making sure he puts the most competent people at the top jobs. His first job is to find an excellent CIO to help him weather the storm (I got a few people in mind).

Mr. Sabia will have hundreds of critics breathing down his neck, watching his every move. He needs to have nerves of steel and quickly ramp-up his knowledge of pension investments and liabilities, making sure he surrounds himself with the best and the brightest.

But for now, Mr. Sabia can relish his "coup d'état." He has surprised everyone, including yours truly, by taking on the challenge of his life.

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